White Nile Software, Inc. v. Mandel (In re Mandel)
| Decision Date | 31 March 2017 |
| Docket Number | Case No. 10-40219,Adv. Proc. No. 12-4127,Adv. Proc. No. 12-4128 |
| Parties | IN RE: EDWARD MANDEL, Debtor. WHITE NILE SOFTWARE, INC., ROSA R. ORENSTEIN, RECEIVER, and MASTROGIOVANNI, SCHORSCH and MERSKY, Plaintiffs, v. EDWARD MANDEL, Defendant. STEVEN THRASHER, individually and for WHITE NILE SOFTWARE, INC., JASON COLEMAN, MADDENSEWELL, LLP, and LAW OFFICES OF MITCHELL MADDEN, Plaintiffs, v. EDWARD MANDEL, Defendant. |
| Court | U.S. Bankruptcy Court — Eastern District of Texas |
The Court consolidated the above-styled adversary proceedings for purposes of trial. The Plaintiffs seek a denial of the Defendant's discharge or, in the alternative, a judgment of nondischargeability with respect to the Defendant's obligations to the Plaintiffs. The Plaintiffs also seek a declaratory judgment that the Defendant is the alter-ego of various non-debtor entities. The Court tried the complaints over several days and, at the conclusion of trial, took the matter under advisement in order to prepare a detailed written ruling.
The Court makes the following findings of fact and conclusions of law pursuant to Federal Rule of Bankruptcy Procedure 7052.
The Plaintiffs claim that the Defendant's discharge should be barred, for a number of reasons, both separately and collectively, pursuant to Bankruptcy Code §§ 727(a)(2)(A) and (B), 727(a)(3) and/or 727(a)(4). The Plaintiffs contend that the Defendant should not receive a discharge, because he denuded his bankruptcy estate through transfers among non-debtor entities, he failed to keep adequate books and records, and he made false and misleading statements to this Court regarding his income and assets. The Plaintiffs also claim, in the alternative, that all amounts which the Defendant owes the Plaintiffs should not be discharged, again on several bases. The Plaintiffs essentially contend that because of the preclusive effect of this Court's prior order allowing their claims against the Defendant for fraud, breach of fiduciary duty, and a violation of the Texas Theft Liability Act, the awards for such claims are nondischargeable under §§ 523(a)(4), (6) and/or 523(a)(2)(A). The Plaintiffs contend that their attorneys' fees are likewise nondischargeable, because they are ancillary to the primary, nondischargeable debt.
The Defendant, Edward Mandel, filed for protection under Chapter 11 of the Bankruptcy Code on January 25, 2010. The last day to oppose Mandel's discharge or object to the dischargeability of a particular debt was 90 days after the petition date - April 23, 2010. Overthe next two years, the Court granted several motions by the Plaintiffs to extend the deadline and approved a stipulation among the parties, including Mandel, to extend the deadline.
On February 13, 2012, several of the Plaintiffs moved for the appointment of a Chapter 11 trustee. The Court granted their motion following a hearing. On June 18, 2012, the Court appointed Milo Segner as the Chapter 11 trustee in the Debtor's case.
On August 22, 2012, White Nile Software, Inc., Rosa Orenstein, as the receiver for White Nile, and Mastrogiavanni, Schorsch and Mersky ("MSM") timely filed an adversary complaint against Mandel. The Court assigned the proceeding number 12-4127. (The Court will refer to this proceeding as the Orenstein proceeding.) In addition, on August 22, 2012, Steven Thrasher, individually and for White Nile, Jason Coleman, Maddensewell, LLP, and Law Offices of Mitchell Madden timely filed an adversary complaint against Mandel. The Court assigned the proceeding number 12-4128. (The Court will refer to this proceeding as the Thrasher proceeding.)
The Plaintiffs in the Orenstein proceeding amended their adversary complaint on November 15, 2012. The amended complaint asserts objections to discharge under 11 U.S.C. §§ 727(a)(2), (a)(3) and (a)(4) as well as objections to dischargeability under 11 U.S.C. §§ 523(a)(2)(A), (a)(4) and (a)(6).
The Plaintiffs in the Thrasher proceeding amended their adversary complaint on November 14, 2012. The amended complaint seeks a declaration of alter ego, asserts objections to discharge under 11 U.S.C. §§ 727(a)(2)(A) and (B), (a)(3) and (a)(4), and assets objections to dischargeability under 11 U.S.C. §§ 523(a)(2)(A), (a)(4) and (a)(6).1
On November 13, 2014, Segner moved to convert Mandel's case to Chapter 7 due to the impossibility of confirming a plan of reorganization. The Court granted the trustee's motion and entered an order converting the case to Chapter 7 on December 19, 2014. Segner remained the bankruptcy trustee when the case converted to Chapter 7. The deadline for objecting to Mandel's discharge or the dischargeability of a particular debt in the converted case was 90 days after conversion - March 13, 2015.
Prior to the trial of the adversary proceedings, the parties submitted joint pre-trial orders to the Court for each of the adversary proceedings. The only undisputed fact contained in the pretrial orders is the date of Mandel's original bankruptcy petition.2 With this single undisputed fact in mind, and having considered the admissible evidence presented at trial, the parties' arguments at trial, and the record of the underlying bankruptcy case, including this Court's prior decisions as well as the decisions issued by reviewing courts on appeal, the Court makes the following additional findings of fact.
1. First, as a matter of background, the Court will summarize the decisions that led to the claims at issue in these adversary proceedings.
2. The litigation between Mandel, Thrasher and Coleman arises out of the failure of White Nile. Thrasher, an intellectual property attorney, conceived of what he believed to be a new type of search engine. Mandel and Thrasher formed White Nile to develop and holdThrasher's invention. White Nile hired Coleman to work on a graphic representation of what the search engine would look like when complete.
3. Mandel, Thrasher, Coleman and White Nile were engaged in litigation prior to Mandle's bankruptcy petition. A state court had appointed Rosa Orenstein as receiver for White Nile, and Mandel had agreed to pay 52.5% of the receiver's fees. Orenstein retained counsel, with the approval of the state court, and presented Mandel with a bill for $14,000. Mandel refused to pay, and he filed for bankruptcy on the eve of a sanctions hearing.
4. Coleman, individually, and Thrasher, individually and on behalf of White Nile, filed unliquidated claims in Mandel's bankruptcy case. Mandel objected to their allowance against his bankruptcy estate. This Court tried their claims and, on September 30, 2011, issued an opinion and order awarding $1,000,000 to Thrasher, $400,000 to Coleman, and $300,000 to White Nile See In re Mandel, 2011 WL 4599969 (Bankr. E.D. Tex. Sept. 30, 2011). In addition, the Court awarded Thrasher and Coleman their reasonable attorney's fees in the total amount of $1,500,000 ($795,000 for the Law Offices of Mitchell Madden and $705,000 for Elvin E. Smith) plus costs in the total amount of $255,989.48 ($232,308 for the Law Offices of Mitchell Madden and $23,681.48 for Elvin E. Smith). See id.
5. The facts that underlie the claims of Thrasher, White Nile and Coleman are familiar to the parties. The Court set out the facts in detail in its September 30, 2011, decision and will not burden its present decision by repeating the facts in their entirety. However, as relevant to these adversary proceedings, the Court made the following findings and reached the following conclusions in its prior decision:
6. An appeal ensued. The Fifth Circuit upheld all of the Court's material findings and conclusions and agreed that "Thrasher and Coleman did suffer some damage." In re Mandel, 578 Fed. Appx. 376 (5th Cir. 2014). The Fifth Circuit, however, remanded the issue of compensatory damages in order to allow this Court to "either conduct an additional evidentiary hearing on the issue of damages or explain its award of damages on the basis of the evidence inthe present record." Id. at 391. Subsequently, on September 20, 2015, this Court entered a Memorandum Opinion and Order on Remand regarding damages and, on March 23, 2016, a Memorandum Opinion and Order on Claimants' Motion for Reconsideration.3
7. Rosa Orenstein and Mastrogiovanni, Schorsch & Mersky, P.C. ("MSM") also filed claims against Mandel's bankruptcy estate for...
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